Medium size threshold proposed for small “Code companies”

A bill currently before Parliament will introduce a “medium size” threshold for unlisted companies before they become subject to the Takeovers Code. The law change will help ease compliance burden for many start-ups and SME businesses, and is discussed in more detail below.

What is a “Code company”?

By way of a recap, the Takeovers Code (Code) currently applies to any New Zealand company that:

is listed on the NZX or has been delisted from the NZX for less than 12 months; or

has 50 or more shareholders and 50 or more share parcels on issue that carry voting rights.

The absence of a financial threshold in the second limb inadvertently results in a significant number of companies falling within the reach of the Code. While the Code regulates takeover activity, it also captures any transaction involving more than 20% of the voting rights in a company. This limits flexibility with capital raising and issuing shares to employees, amongst other issues. If a transaction is caught by the Code, it can result in disproportionately high compliance costs and delays for a company.

Over the years, companies (and their legal advisers) have devised various strategies to help unlisted companies with not being captured by the Code. Commonplace structures include issuing non-voting shares or transferring voting shares into a nominee company or trust (so that the number of shareholders drops below 50). While these strategies can be effective, it would be far more preferable for the law to exclude companies that fall below a specified financial level.

Proposed “medium size” threshold

The Regulatory Systems (Economic Development) Amendment (No 2) Bill will add a requirement that an unlisted company is “at least medium sized” in addition to satisfying the 50 shareholder and 50 share parcel requirements. A company is “at least medium sized” if:

on the last day of the company’s most recently completed accounting period, the total assets of the company and its subsidiaries (if any) are at least $30 million; and/or

in the company’s most recently completed accounting period, the total revenue of the company and its subsidiaries (if any) is at least $15 million.

For a new company that has not yet completed an accounting period, the company is “at least medium sized” if on the last day of any month the total assets of it and its subsidiaries (if any) are at least $30 million.

At the time of writing, the bill has been reported back from Select Committee and is due to have its second reading in Parliament. We expect that the change will become law in the very near future.

Any company that is listed on the NZX will continue to be a Code company.

What goes around, comes around for small Code companies

Interestingly, when the Code was first introduced in 2001 it included a $20 million asset threshold, but this was removed in 2012. Since 2016, the Takeovers Panel has had a class exemption in place that relieved many of the compliance requirements for small Code companies (subject to conditions).

It is pleasing to see the law will finally provide the clarity of a financial threshold at which an unlisted company becomes a Code company. If you have any questions about how the law change might apply to your business, please do not hesitate to contact us.